I know, we're all in the throes of holiday madness. Most of our Christmas trees are up and we're chopping away at that to-do list. Why do we need to think about taxes? I bet the only time taxes crossed your mind was when you were eyeing that credit card bill. Many Americans rely on a tax refund to fund their Christmas purchases from the year prior. Yet, how sure are you that a refund is coming your way? What happens if you break even or actually owe?
Here's where tax avoidance is helpful. No, we're not talking tax evasion. That's illegal, and probably why you clicked to read this blog post. Here's your quick vocabulary lesson of the week:
Tax evasion: deliberately and willfully hiding income, falsely claiming deductions or otherwise cheating the government out of taxes owed. It's illegal.
Tax avoidance: reducing tax liability through legal and transparent techniques.
Here are some last minute tips you can apply in December to help your future self come April 2023:
Look into your tax withholding: Do you know where to find this? Ask your employer for your W4, and then fill out the IRS Tax Withholding Estimator. This will give you a good idea of where you stand and if you're way off, you can adjust this for 2023.
Use your flex spending account (FSA) money before the ball drops: contributions to your FSA reduce your taxable income, but this doesn't help if that money is thrown away. Spend the amount in your account by 12/31. Schedule dental cleanings, eye exams, or primary care check-ups. Fill prescriptions and stock up on FSA-approved items (some of these make great gifts for others).
Put extra into your health savings account (HSA): If it's looking like you'll owe taxes, you can reduce your taxable income by contributing to your HSA. Talk to your employer/HR about this process.
Donate to charity if you itemize, and get a receipt: You've likely heard of this one, however it's most helpful if you have a large contribution and itemize at tax time. This is another way to reduce taxable income, but talk to a CPA before writing that check.
Contribute more to your retirement: The last (simple) way to reduce your taxable income is to pay yourself more. Review your annual contributions (I love my annual phone call to Fidelity) and see if you have wiggle room. Up to age 49, you can contribute up to $20,500 in a 401(k) and up to $6,000 in an IRA. These numbers jump to $27,000 and $7,000 respectively for those over the age of 50. Always check with your CPA first, and make sure you're meeting your basic needs financially before diverting funds to retirement accounts.
If this is too overwhelming or you feel that you're too late to work on your tax plan for 2023, don't worry. You're ahead of most people and by thinking of this now, you start the trend to evaluate your tax situation earlier and earlier each year. Have a merry Christmas!